Transocean Can Tap $71 With Improved Efficiency, Management
It’s no secret that stock prices can swing based on investor or analyst perceptions, which certainly seems to be the case for Swiss-based Transocean Limited (NYSE:RIG), one of the world’s leaders in oil rig leasing and exploration. Like Baker Hughes (NYSE:BHI), the company will be glad to leave 2011 behind them. Whether 2012 will finally bring an end to the Macondo disaster in the Gulf of Mexico and the rift with BP (NYSE:BP) is anyone’s guess. For Transocean investors, regaining confidence in management and the continued expansion in offshore drilling are at the top of most wish lists. Perhaps most importantly for the company in 2012 is managing rig downtime. With a full 95% of the Trefis stock price derived from the Contract Drilling Division, keeping rigs maintained and operating is paramount.
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Downtime Equates to Downward Pressure
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Unfortunately, Transoceans’s problems with rig downtime have gotten worse, not better. Revenue efficiency, or the actual revenue earned vs. the highest possible revenue assuming all rigs were active, has declined each of the last two quarters. The result is lower margins associated with being rigs being out of service.
Another byproduct of Transocean’s downtime problems are management’s forecasts. There will always be downtime, but managing investor expectations by providing accurate expectations is seen by some as a reflection on management itself. In Q1 of this year Transocean predicted downtime would be an accumulated 47 months. Through the next two quarters the actual downtime was 71 months and counting. Inaccurate estimates like these lead to negative perceptions, ultimately pressuring the stock price.
It’s Time to Look Forward
What sounds like a lot of doom and gloom may not be quite as bad as some investors believe. As downtime decreases through 2012, expenses will come in line and revenues will increase. Perceptions that have hurt the company will begin to change for the better and investors can start focusing on the positives.
The increasing market for deep sea rigs is ideal for Transocean and should begin to positively impact earnings. As legal issues get cleaned up, management can focus their energies on what is expected to be a very strong oil market in 2012.
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